Ray Boulger's Blog

Pre Budget Thoughts

Key figures economists will be waiting for from The Chancellor in his budget speech will be revised deficit forecasts for the rest of this Parliament. Whatever tax increases or decreases George Osborne announces are likely to pale into insignificance compared to the boost he will get from the weakness of the global economy.

It may seem counter intuitive for The Chancellor’s budget forecasts to benefit from a weak global economy but with inflation close to zero, although the recent partial recovery in the oil price may prevent a further fall into negative territory, and increasing numbers of western central banks not merely cutting interest rates but moving deeper into negative interest rate territory, gilt yields have not only fallen to record levels but the yield curve, i.e. the spread between short and long dated gilts, has narrowed considerably since the last budget.

For the second year running this will give The Chancellor a huge bonus as the forecast for one of his biggest expenditure items, the cost of financing the national debt, will be cut for each of the next few years. The highest ever coupon on a UK gilt was 15½%, a stock which was redeemed in 1998, but very long dated conventional gilts now yield less than 2½%. Likewise, with inflation at current levels the cost of financing index-linked stocks is also at historically low levels.

As far as the housing market is concerned one announcement we know will be included are the final rules for the 3% stamp duty surcharge on purchasers who already own at least one property. Based on the initial Treasury “clarification” shortly after the Autumn Statement, the original announcement was made without sufficient understanding of some of its implications. The Chancellor’s recent decision not to proceed with his radical pension proposals provides some encouragement that he is prepared to react to expert comments and this provides hope that he will also reflect the responses to his consultation on the stamp duty surcharge by making the final rules less unfair.

As the biggest problem for first time buyers is finding the deposit, and stamp duty land tax, the concept that making BTL investors pay an extra 3% will have a significant impact in helping FTBs, as the Chancellor claims, is fundamentally flawed. The real reason for this stamp duty surcharge is no doubt more about raising tax than helping FTBs. To the extent it is successful in deterring BTL investors from acquiring property it will reduce the supply of property to rent, with the obvious impact on choice and cost for those who want to, or need to, rent.

As drafted the surcharge will unfairly penalise some people it appears it was never designed to hit, in particular some people buying a new man residence. As the policy intention appears to be not to charge the 3% surcharge to anyone buying a new main residence, even if that purchaser(s) owns 100s of other properties, I suggest introducing a simple amendment making it clear that, providing the tests for a main residence specified in the Treasury consultation document are met, the 3% surcharge will not be payable. This would also avoid HMRC having to set up a mechanism to refund the tax on occasions when a purchase precedes a sale.

I also expect further details on the Starter Homes Initiative. Bearing in mind this initiative was first announced a year ago the fact that financing options for purchasers have still not been finalised with mortgage lenders is a damning indictment of the red tape the Government appears to have to go through, perhaps because of state aid rules, to agree something which should not be too difficult.

For the scheme to achieve anything even approaching the Government’s target, buyers need as many options as possible, bearing in mind that as purchases are limited to FTBs under 40 a large proportion of buyers will only have a 5% deposit. Some will prefer a standard mortgage but others will prefer to use the Help to Buy equity share second charge mortgage. If the Government does not make this option available many buyers are likely to shun the scheme in favour of an alternative new build property where they can use this scheme, which makes a massive different to both the interest rate they pay and monthly costs.

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The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.

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